Centralization and Decentralization — blockchain and Kindleberger

Over the past few weeks, we’ve seen a lot of conversation about centralization in tech and the promise of the likes of Bitcoin to help us decentralize. While this is an important conversation, I think some of the faith placed on Bitcoin and blockchains is likely misplaced. Let’s dig into why.

Centralization
Along with Geoffrey Hinton and Yann LeCun, Yoshua Bengio will undoubtedly go down in history as the technology legends whose work on deep learning kick-started the Artificial Intelligence wave. Hinton and LeCun lead AI research at Google and Facebook respectively. Yoshua Bengio advises Microsoft and IBM — but has not taken a full time role at any of the big tech firms. That, in turn, is because he believes centralization of wealth, power and capability in big tech is dangerous for democracy.

From the Axios article on the topic (link to the article below) —

“We need to create a more level playing field for people and companies,” Bengio told Axios at an AI conference in Toronto last week.

In recent years, Apple, Facebook, Google and Microsoft have amassed a towering lead in AI research. But now, they are subject to growing scrutiny because of their outsized influence on society, politics and the economy. I asked Bengio if the companies should be broken up. He harrumphed and responded that anti-trust laws should be enforced. “Governments have become so meek in front of companies,” he said.

“AI is a technology that naturally lends itself to a winner take all,” Bengio said. “The country and company that dominates the technology will gain more power with time. More data and a larger customer base gives you an advantage that is hard to dislodge. Scientists want to go to the best places. The company with the best research labs will attract the best talent. It becomes a concentration of wealth and power.”

I touched on this idea when I wrote about the chasm a few editions ago. The AI wave makes it harder for anyone who doesn’t have the kind of data the big technology firms have access to.

John Battelle, a leading technology journalist, recently had a thoughtful piece on NewCo Shift titled — “How did we end up here?” His post is a solid primer on Google and Facebook’s rise to power and ends with this.

Suffice to say, big regulation is coming for big tech. Never in the history of the tech industry has the 1996 CDMA ruling granting tech platforms immunity from the consequences of speech on their own platforms been more germane. Whether it’s in jeopardy or not remains to be seen.

This is not a simple issue, and resolving it will require a level of rational discourse and debate that’s been starkly absent from our national dialog these past few years. At stake is not only the fundamental advertising models that built our most valuable tech companies, but also the essential forces and presumptions driving our system of democratic capitalism*. Not to mention the nascent but utterly critical debate around the role of algorithms in civil society. And as we explore solutions to what increasingly feels like an intractable set of questions, we’d do well to keep one word in mind: Context.

The last few weeks have been witness to a perceptible change in sentiment around the big tech firms. The New York Times wrote about countries banning Facebook in response to fear of its power. The Economist pondered about whether big tech firms should be regulated as if they were utilities.

While we’ve seen many such pieces over the course of this year, the volume in the last 2 weeks does suggest that something is different this time. Increased concerns about the effects of the filter bubble on the 2016 election are one thing. But, the combination of Russian funded ads and revelations around racist targeting on Google and Facebook clearly reveal deep and fundamental issues with the status quo.

How do we decentralize?
Every information industry has struggled with centralization over time. For the big tech firms today, we had AT&T in telephony, NBC and CBS in Cable and Paramount Pictures in film. In each of these cases, government aided decentralization followed. So, it makes sense that many are looking to the US government.

But, given everything else the US government has been dealing with, action on this issue doesn’t seem to be high on the agenda. So, it makes sense that Denmark appointed Casper Klynge as the first ever “tech ambassador.” From an Exclusive on GovInsider —

“On an individual basis, certain companies are enormously influential in both positive and negative ways,” Tech Ambassador Casper Klynge believes. This “completely underlined the need for techplomacy’,” he adds. “These companies are also policy actors, and indeed, foreign policy actors in their own right,” he tells GovInsider, with power over elections, government policies, and vast investments.

Technologists/hackers, on the other hand, seem to have largely placed their bets on the blockchain. For now, many of the discussions around Bitcoin and the blockchain talk about these as the cure all for all centralization issues. We are going to move away from massive information monopolies to a decentralized world where we own our data, etc., etc.

Before I explain why I’m skeptical, let’s revisit Bitcoin and blockchains.

Bitcoin mania
Interest in Bitcoin (thanks Google trends) has been very high this year.

Bitcoin’s price chart looks similar to the Google Trends chart.

A lot has happened since I last wrote about the Blockchain and ICO’s a few months back. Conversations about Bitcoin and Initial Coin Offerings (ICOs) have become part of the mainstream media. Start-ups have raised more money via ICOs instead of via traditional venture capital. And, blockchains have gotten purists misty eyed as a way to rid society of its many socio-economic problems.

How much of all this is true? And, how do we make sense of all of this?

My sense is that the best way to make sense of this is to break apart this apart into 3 pieces — 
 1. The technological breakthrough 
 2. Its first order implications
 3. Questions about its second order socio-economic implications.

Breaking down the breakthrough

Technology breakthrough: A blockchain is a decentralized network with information. The breakthrough in the blockchain is in the ability to have a decentralized database that is not owned by anyone. This was not possible before and means we can now have shared incorruptible databases.

First order implication of the technology breakthrough: Databases controlled by middle people (e.g. banks) were sources of trust for various transactions in the economy. Now, you don’t need to have these middle people. Instead, you could, for example, execute a pre-agreed contract via the Ethereum blockchain. As long as certain conditions are met (e.g. money is transferred to account B), ownership can be transferred too.

Example question about its second order socio-economic implication: Blockchains could render important pillars of our financial system obsolete. Maybe this will remove the need for banks, central banks and governments?
 
In the many discussions about blockchains, I see people mixing the technology breakthrough and its potential second order implications. Here’s the deal — the breakthrough and its first order implications are here to stay. But, all of the implications being dreamed up right now are not necessarily going to pan out the way many of the purists imagine it.

Here’s an example of why I’m bullish about the technology -

  • Imagine you are a refugee in a new country. You have no official ID or financial history in the country — so, banks aren’t exactly queuing up to give you an account.
  • But, as a refugee, the government would like to give you some aid to get you started. However, they’d also like to keep tabs on that money to make sure you are spending it responsibly.
  • Without easy access to money, you could be stuck in bureaucratic hell for a long time.
  • Enter Moni — a prepaid mastercard service that links your mastercard to the blockchain.
  • Your prepaid card doesn’t need any bank. The government directly adds credit and knows they can track any issues in your spending via an incorruptible database on the blockchain.
  • Assuming you have good intentions, you use this money to get your life started, get a job and are hopefully on your way to building a better life.

This is not fiction. The Finnish government is already testing this with asylum seekers and the United Nations is exploring using this technology for one billion people worldwide who have no legal identification. Powerful stuff.

What else can a virtually incorruptible database do?
In today’s global supply chain, it might take days for a retailer to trace exactly where a particular fruit came from. For Walmart, a manual search to retrace these steps took 6 days. In the event of a Salmonella outbreak, a long delay such as this can be the difference between life and death. Walmart, for example, would have to pull every fruit off its shelf to guard against the risk. So, their search for the technology that solves food traceability has largely been long and futile.

But, Walmart, in partnership with IBM and the Linux Foundation’s Hyperledger Fabric, tested food shipments that were tracked with numeric identifiers and digitally recorded on a blockchain powered database every time they moved to a new destination. Now, WalMart has access to the entire history of this piece of fruit within 2 seconds.

An incorruptible database isn’t just helpful for dealing with emergencies. They could help prevent fraud and also help executives and regulators keep tabs on the flow of goods. This obviously helps any global company dealing with complex supply chains.

And, these are just two of many game changing examples.

TCP/IP?
In the article that talked about WalMart’s blockchain experiment, Robert Hackett of Fortune pays a big compliment to Satoshi Nakomoto (the creator of Bitcoin and, thus, the Blockchain) by comparing what’s happening right now to the seminal creation of the TCP/IP protocol in the 1970s. This incredible invention, created by Bob Kahn and Vint Cerf, helped computers exchange bits with each other through telephone wires and created the network of networks that we know of today as the internet. (One of its early visionaries, JCR Licklider, called this idea the “Intergalactic Computer Network” — recognizing this big idea for what it was)

It isn’t misplaced. The technology breakthrough is seminal. And, Robert Hackett explains what happens when we put the technology breakthrough and its first order implication (commoditizing trust) together —

If the Internet is a supranetwork, then a blockchain, in its purest form, is a way to turn these networks into decentralized marketplaces. Ronald Coase, a 20th-century economist, won a Nobel Prize for formulating an explanation for why corporations existed. Their raison d’être, he said, was to maximize efficiencies in business and market negotiations: Dealmaking is more productive when done collectively. Blockchains could take that principle and multiply it exponentially.

For now, this vision feels much too distance. For starters -

  • Most folks who invest in blockchains don’t actually use them.
  • ICOs, given their propensity to create wealth quickly, have attracted a ton of scammers.
  • Ethereum, one of the more advanced blockchains, is still 250x slower from being able to run an app with 10 million users.
  • Bitcoin’s energy consumption stats are ridiculous and feel unsustainable — the Bitcoin network alone uses as much as energy as 5% of the UK or 7.5% of Australia.
  • Tokens seem to just be a hack into the current legal and regulatory system for raising money.

But, if this is indeed the equivalent of TCP/IP in the 1970, we have ways to go. Even if we assume we’re in the pre-Netscape portion of the internet, we’re still two decades away from this technology hitting the mainstream.

Tokens and potential second order effects

Naval Ravikant’s insightful tweet alludes to the power of crypto tokens. Here’s a quick summary on tokens -

  • Imagine you are starting a new service built on the blockchain — say a supply chain tool to help WalMart
  • Instead of going through traditional fund raising, you start SupplyCoin and do an ICO to sell 10% of these coins
  • The buyers of the new offering pay up Bitcoins to get these tokens worth $10M in the hope of future return (much like the stock market). These tokens can be traded but don’t confer ownership rights.
  • You use the $10M to fund the project and distribute the remaining $90M across 5 constituents — users (i.e. WalMart and others that adopt), core developers (your team), third-party developers (who add awesome add ons), investors and service providers (e.g. the AWS equivalent for hosting).
  • These tokens are liquid and their value goes up as more people buy into SupplyCoin.

Current bubble issues aside, this is an alternative route to financing — similar, in some ways, to crowdfunding. There’s a lot of talk about how venture capitalists are going to be disrupted. But, while it is a new way of investing and involves betting on different kinds of technology (“fat protocols” versus applications — or, put differently, the infrastructure layer for the blockchain based internet versus apps like Facebook given we’re in the early stages), I still don’t see the doomsday predictions working out any time in the next decade. It’ll, of course, hurt any venture capitalists who behave as if money is their only value proposition. And, that’s a good thing.

The ability to tokenize assets is a first order effect of blockchains. They will unlock a lot of value over time. However, there are a ton of potential second order effects of tokens (e.g. the death of venture capitalists) that are not likely to materialize — at least not in the extreme ways they’re talked about now. There’s a lot that stands between the current state and the desired purist end state. Without question, regulation is going to be a key determinant in how far we move toward that end state.

History doesn’t repeat itself — but it does rhyme
We’ve been here before.

A new technology, pioneered by hackers and hobbyists, threatening to decentralize expression and speech. See: early days of the internet, cable, telephone and the radio.

A new piece of financial technology that makes transactions easier and more trustworthy. See: creation of a clearing house in 1773, various innovations by merchants in medieval Europe that made today’s brand of capitalism possible.

A new technology thought to rid current society of all its political and socioeconomic evils. See: every new information technology.

The blockchain is likely going to go down as among the greatest technological breakthroughs of this century. It is going to help us solve problems we weren’t able to solve before and help provide opportunities for more people to build businesses and get their voices heard.

Just like the internet, the blockchain will make things, on aggregate, better.

But, it is not going to be the cure all. We are going to need lots of good regulation to be able to make the kind of progress that we’d all be proud of. There is also no guarantee that the internet or social networks built on the blockchain are going to be free from centralization. Going by history, it’ll start decentralized and become centralized over time. This is already happening with Bitcoin mining — ~30% of Bitcoin mining comes from one country in China.

So, as new as this all seems, this has happened before. Or, to put it more eloquently, I’ll quote the first paragraph of an article from “The Economist” on why Bitcoin may not be as novel as we think it is —

Financiers with PhDs like to remind each other to “read your Kindleberger”. The rare academic who could speak fluently to bureaucrats and normal people, Charles Kindleberger designed the Marshall Plan and wrote vast economic histories worthy of Tolstoy. “Read your Kindleberger” is just a coded way of saying “don’t forget this has all happened before”. So to anyone invested in, mining or building applications for distributed ledger money such as bitcoin or ethereum: read your Kindleberger.

We should all read our Kindleberger


Links for additional reading

  • The excellent Exponential View newsletter by Azeem Azhar (I got a bunch of these links from the newsletter over the past few weeks)
  • Yoshua Bengio calling for breakup of Big Tech — on Axios
  • Change in sentiment on Big Tech — on The Economist and and The New York Times
  • Lost Context: How Did We End Up Here? — on NewCo Shift
  • Denmark appoints a tech ambassador — on GovInsider
  • How Blockchain Is Kickstarting the Financial Lives of Refugees — on MIT’s Technology Review
  • Why Big Business Is Racing to Build Blockchains — on Fortune (recommended read)
  • Scaling Ethereum — on Medium
  • Token liquidity — on Preston Byrne’s blog
  • Why the Blockchain is so disruptive for venture capital — on Version One’s blog
  • Bitcoin is fiat money, too — on The Economist
  • Bitcoin’s real value may be 0 — on Business Standard
    The case for and against crypto currencies — on Mark Suster’s blog
  • Bitmain dominates Bitcoin mining — on Quartz
  • Decentralized social networks will not work — on Wired
  • We have a long way to go before we create decentralized media — on MIT
  • Two previous “Notes by Ada” notes on Bitcoins — an Intro and on ICOs

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